Last month The Motley Fool posted an article: “3 Growth Companies I’d Buy Now: Globo PLC, Plus500 Ltd And Quindell PLC” (http://is.gd/fNuuGU).
What I write here is mostly me talking to my hat, and not to be taken seriously. It’s just to test my hunches, and see how things pan out in a year’s time.
All three companies are touted as GARP shares, are listed on AIM, and have PEs less than 10. The AIM index has taken a terrible tumble this year. AIM 100 has gone from a high of about 4083 in Feb 2014, to 3133 as of today. So AIM is definitely into bear territory, but there are signs that it is making a V-shaped recovery. The three touted companies may therefore make strong rallies.
Yet, I have my doubts. I recall that, in the past, TMF posted a similar article containing both cheap and expensive growth shares. Contrary to expectations, it was the expensive ones that performed well, and the cheap ones that performed badly. Great growth companies “should” be on lofty PE ratings, so to find them in the bargain bucket means they don’t pass the smell test.
Let me take each company in turn.
GBO: Globo “is engaged in the provision of telecom, mobile software products and related services, as well as developing and operating broadband wired and wireless networks”. In March 2014, Paul Scott wrote wrote: “the Balance Sheet is where the bodies are buried at companies which engage in aggressive accounting techniques. Therefore ignore those warning signs at your peril” (http://is.gd/fmJJJF). He also expressed concerns about the change in auditor.
I will add my own tuppence: operating margins come in at 38.2%, far in excess of the Software sector average of 6.8%. As my Physics teacher would often say: “the results are too true to be good”. The company has also been issuing a lot of shares. The company also has a lot of cash. On the face of it, that is a good sign, but I have seen many many situations where scam companies had a lot of cash. The company’s raised £43.6m from financing activities in 2013, partly by isssuing shares, and partly by raising debt.
GBO is too suspiciously good in my books. PE of 5.01
PLUS: Plus500, “formerly Investsoft Ltd., is an Israel-based company, which develops and operates an online trading platform for retail customers to trade a contract for difference (CFD) internationally over more than 1,700 different underlying global financial instruments, comprising equities, exchange traded funds (ETF), foreign exchange, indices and commodities. ”
Foreign-listed companies on AIM make me nervous. The company had $50m turnover in 2011, $115m in 2013, and is expected to have $226m in turnover in 2015. The company listed in July 2013, so it has yet to prove itself, in my books. PLUS has plenty of cash. Stockopedia gives its ROCE as 132%, which seems improbable. Its operating margin is 66.4%, against investment services industry of 20.4%. By way of comparison, IGG, which operates in a similar business, “only” has operating margins of 47.2%, and a ROCE of 34.3%.
Something’s not right here. PE of 8.92.
QPP: Qundell is “engaged in sale of software and consulting services, and the provision of technology enabled business process outsourcing services to brands operating in the sectors, which include Insurance, Finance, Health and Legal; Telecoms, Utilities, Retail and E-commerce, and Government and Public Sector.” So much has been said about QPP that I would not be able to contribute anything new, but here is a brief rundown on some of the concerns: its operating cashflow is negative, it receivables are suspiciously high, its acquisition strategy has been questioned, and the true nature of recent director transactions is hazy.
It, too, has operating margins that are implausible: 38.2%
What a mess. PE of 0.89, so it’s either ridiculously cheap, or the Mr Market knows something that shareholders don’t. QPP has a momentum rank of 19, which is incongruent to being a growth company. Stockopedia also flags its Earnings Manipulation Risk as High.
I’ll come back in a year and see if my negativity was justified.
GBO 38.97p. PLUS 527.24p. QPP 68.50p. ASX 3555
Edit 16-Nov-2014: Corrected many typos.